marriott
Case
Study:
Marriott
Corporation
The
Cost
of
Capital
Teresa
Cortez
Keith
Gemmell
Brandon
Papsidero
Robin
Reschke
October
28,
2013
Table
of
Contents
1.
Are the four components of Marriott’s financial strategy consistent with its growth objective? ...................................................................................................................... 1
2.
How does Marriott use its estimate of its cost of capital? Does this make sense? ...... 3
3.
What is the weighted average cost of capital for Marriott Corporation? ..................... 4
4.
What type of investments would you value using Marriott’s WACC? ........................ 6
5.
If Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company over time? ......... 7
6.
What is the cost of capital for the lodging and restaurant divisions of Marriott? ........ 8
7.
What is the cost of capital for Marriott’s contract services division? How can you estimate its equity costs without publicly traded comparable companies? ................ 11
APPENDIX I – Math Utilized to Derive WACC for Marriott .......................................... 13
APPENDIX II – Math Utilized to Derive WACC for Divisions ...................................... 16
BA
626
Financial
Decision
Making
ii
1.
Are
the
four
components
of
Marriott’s
financial
strategy
consistent
with
its
growth
objective?
The
four
components
of
Marriott’s
financial
strategy
are
to
manage
rather
than
own
hotel
assets,
to
invest
in
projects
that
increase
shareholder
value,
to
optimize
the
use
of
debt
in
the
capital
structure,
and
to
repurchase
undervalued
shares
when
necessary.
Marriott’s
growth
objective
is
to
become
the
preferred
employer
and
provider
in
lodging,
contract
services
(such
as
catering),
and
restaurants,
and
to
be
the
most
profitable
company
in
their
industry.
By
choosing
to
manage
hotel
properties
instead
of
owning
them
Marriott
lowers
their
accounting
assets
on
the
books,
therefore
increasing
their
return
on
assets
as
compared
to
owning
the
properties
outright.
This
strategy
also
effectively
shares
the
risk
that
comes
from
the
properties,
and
lets
Marriott
operate
with
more
liquidity,
offering
them
the
opportunity
to
relocate
their
hotel
or
restaurant
operations
without
the
need
to
sell
properties,
for
instance.
Marriott
can
analyze
potential
projects
and
discount
the
future
cash
flows
to
determine
which
projects
will
have
a
higher
net
present
value,
and
ultimately
which
will
be
most
profitable
to
Marriott
at
the
present
time,
therefore
increasing
shareholder
wealth.
Balance
sheets...
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